Mortgage mistakes to watch out for

In the world of mortgages there are some pitfalls. First of all, the top priority for anyone looking to buy a home is to repair credit. Order copies of all three of your credit reports and read them thoroughly. A good time frame to order them is six months prior to buying. That way you can challenge any errors and have sufficient time to get them fixed. It also gives you time to pay down your credit balance on any credit card. You want your open-credit-to-available-credit ratio to be as low as possible. This can increase your credit score considerably.

Next, you want to get pre-approved for a loan. There is a difference between being pre-qualified and pre-approved. Being pre-qualified doesn’t mean a whole lot. All it means is that a lender tells you how much you most likely could qualify for in terms of a loan. If you read the fine print on your pre-qualification letter, you most likely will find some wording that tells you that the amounts are “estimates only.” On the other hand, a pre-approval is when you submit your information and have a lender tell you exactly how much you can get. It’s a thorough investigation into your finances that is a perfect gauge of what your loan will look like.

Additional costs you should think about

You also should consider the money it is going to cost to move in. Sure you are going to have closing costs and a down payment, but there are additional costs every potential homeowner should think about. Moving costs, storage costs and repair costs are all additional expenses that some homeowners don’t budget for. Short term loans can come in handy to have a little extra cash for unforeseen costs. Ted Grose, president of the California Association of Mortgage Brokers, stated, “It costs so much just to move in, and then the water heater breaks. Some people are so stretched that they may not be able to make their first mortgage payment on time.”

Borrowing what you need

Another issue to be aware of is making the mistake of borrowing too much money. A lot of people get duped into accepting a loan that is way more than they actually need for the home they want. Just because you can get a loan for $400, 000 doesn’t mean you should. Think about the size of home you really need, and then decide how big a loan you want to repay. Grose added, “Mortgage money is way too easy to get. People tend to overbuy and that can really stress family life. It’s also a formula for foreclosure trouble in the future.”

Buying the home should be fun

Buying a home should be one of the most fun activities of anyone’s life. You are moving onto the next stage of life in new surroundings, and that should afford a lot of good times and build some happy memories. Be sure to fix your credit score, get pre-approved, build up a cash surplus, via short term loans if needed, and target exactly how much you want to borrow. By doing research, you can rest easy as you move into your next dream home.

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Banks use the prepayment penalty for protection

The way they work is that banks would allow the borrower to get lower rates, but in return the buyer would sign a paper stating they must pay a prepayment penalty if their mortgage was paid off between three to five years. Ilyce Glink, publisher of ThinkGlink.com, (see http://www.bankrate.com/finance/mortgages/6-steps-to-a-lower-prepayment-penalty-1.aspx) said, “These contracts were structured to guarantee banks a certain amount of profit. The banks would do a risk calculation or a profit calculation, and the penalty itself was generally set between 2 percent and 4 percent of the loan.”

The sad truth about prepayment penalties is that homebuyers need to sign them, but often times they don’t notice them. Glink added, “The stacks of paperwork homebuyers are required to go through usually disorient them and the cost of prepayment penalties are often ignored.” The problem comes in when the borrower wants to pay off or refinance the loan and the penalty is a reality they have to face.

Ways to handle a prepayment penalty

Clarky David, Debt Diva at CareOne Debt Relief Services, said, “With a mortgage, you’ve entered into a legal contract, and most of the time, the bank is not going to want to go to the effort to renegotiate it.” Although there is now a way to get around a prepayment penalty, there are ways to minimize it. Here are five tips to follow:

1. Find the paperwork. The first step consumers need to take is to make sure that they have a prepayment clause. Glink said, “It usually says ‘prepayment disclosure’ or ‘prepayment penalty disclosure’ at the top. There are usually three or four documents you had to initial to indicate that you read them.”
2. Read the contract. Most of prepayment penalties have a single fee and others have a sliding scale to watch for. The sliding scale ones will decrease the longer a borrower holds the loan. For example, during the first year of the mortgage a homeowner may have a prepayment penalty of 4%, whereas during the third year it may fall to just 1%. For consumers who are in the time span where a rate is set to decrease, this is a great time to wait for a month to save some emergency money.
3. Crunch the numbers. The next thing to do is pull out a calculator and do the math. Sometimes the prepayment penalty is worth the chance to move to a less risky lower-interest loan. Best case scenario, the prepayment penalty is eaten up by overall savings on a new mortgage loan. On the other hand, consumers may have to lower the penalty before they move. Again, it’s best to compare the options mathematically and make a decision based on savings.
4. Talk to the loan officer. The next step is to start negotiating the penalty with the loan officer. Glink said, “The first point of contact should be the loan officer. But if you don’t have any luck there, escalate to a manager. They generally have more pull and decision-making power.” Most likely the penalty won’t be ignored altogether, but there is a chance they may cut back the penalty if a homeowner has some track record of consistent payments for a good amount of time.
5. Get any changes or amendments in writing. Document all discussions and negotiations with everything from the loan officer’s name to the time the discussion was had. Consumers should always request that the deal is sent in writing. A verbal offer is worth nothing and without proper documentation consumers may be starting from square one.

Banks willing to negotiate

Banks are suffering as a result of the recession and aren’t eager to let go of valuable prepayment penalty fees. Despite the contract, they still may be willing to negotiate. For any consumer looking for emergency money, it can be a good option to try to at least shave a few thousands off of a penalty. It may not sound like much, but it can add up to substantial savings in the end.

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Looking to refinancing

The growing reality in today’s economic climate is that home values have plummeted. People who had paid religiously into their mortgages for years were surprised when the economy ate away at the equity they thought they had amassed. That is the stickler when it comes to refinancing. People have such low equity that it hardly qualifies them for a refinance. Add to the equity issue the fact that lenders are much stricter now post-recession and banks are adding higher fees, and it makes for a sector of homeowners who have few options.

The new states of interest rates and home value

The survey done by Credit Suisse showed that about 39% of homeowners in the 30-year fixed-rate segment currently have interest rates of over 7%. A good number of those people could bring their interest rates down two full percentage points if they were able to refinance at current rates. Despite the possibility, however, the number of refinance applications in January of this year was lower than it was this time last year.

Another chronic problem the recession created was the increase of underwater mortgages. This is a condition where homeowners owe more on their houses than what the property is worth. Recent surveys show that almost 25% of all homeowners are currently underwater. Of course that also makes it impossible for them to refinance and find relief. The reality of the banking world is that banks want collateral to back up the loans they are making and with drastically diminishing home values, they aren’t willing to take on the risk. A homeowner, who has no equity on the books, is left with few options when it comes to maneuvering their debt and finding fast cash.

What is being done to help

The overriding issue when it comes to refinancing is how things can change to make more homeowners qualify. Most experts agree that due to lenders creating stricter rules, they are undermining the government’s efforts to allow homeowners to use the lowered interest rate advantage. It defeats the purpose of sustained lows in interest. Fannie Mae and Freddie Mac are also adding their own fees in an effort to raise revenue and mitigate losses. It’s easy to see how mitigating losses and maintaining low interest rates are counteracting one another. Fannie Mae and Freddie Mac are seeking a balance between taking on the risk of low-credit scoring homeowners and giving more people access to credit and refinancing options.

In the future expect more homeowners to be able to refinance and find fast cash like they did in the past. There is a caution, however, that those with drastically low credit scores most likely will not be able to refinance, regardless of what changes lenders make. Though the government and lenders are working together to create more customer-friendly climates for those with less-than-perfect credit, it will take much longer for low-credit customers to find any relief.

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Governments struggling over tax revenue declines

Homeowners looking for cash now are having a difficult time due to their tax bills. Across the country, owners are challenging their tax amounts due to the value of their properties declining. The overall result is that local governments are in danger of losing yet another revenue in the already struggling state coffer. It seems that homeowners from New York to Arizona are arguing about their tax bills, and socioeconomics is not a contributor. Homeowners of $10 million-estates to one-bedroom bungalows are taking up arms against the tax bill.

A nationwide crisis

Gus Kramer, assessor in Contra Costa County, California, (see http://www.cnbc.com/id/31747498) said, “It is worthy of a Dickens story. These people are desperate. They know their home’s gone down in value. They have watched their neighborhoods being boarded up. They literally stand in there and say: ‘When can I have my refund check? I need to feed my family. I need to pay my electric bill.’”

Governments are having a difficult time with the issue. According to a survey done by the National Association of Counties, 76% said that falling property tax revenue was significantly eating away at their budgets. Jacqueline Byers, research director for the firm, said, “In the recession today it’s difficult for any government to give up any revenue. The tax revenue being hit hard couldn’t have come at a worse time.”

The recession and the state budget

The recession was difficult on every local government. The staggering growth in unemployment, lack of spending and a drop in revenues for every business have combined to make it difficult on the states. Although many experts are citing the recession as being officially over, there is still a time to regroup and resettle. Byers added, “Though the recession is behind us, its wake isn’t. We still have to wait and see what needs to be cleared up before the market returns to normal.”

Some counties are trying to make ends meet by raising the tax rates associated with home values. The plan is a sketchy one because homeowners looking for cash now don’t have extra funds to put into their homes. Add to the problem the loss of equity in their properties and it’s a difficult thing to ask for more money. Byers said, “Raising tax rates is like squeezing homeowners for something they just don’t have right now.”

Homeowners are asking for reassessments

Many homeowners are requesting reassessments. For example, in Atlanta, Georgia, thousands of people lined up at the local government office to file a request for a reassessment. In Ohio the numbers of requests have multiplied five times over. Robert W. Singer, mayor of Lakewood Township, New Jersey, said, “We have been absolutely getting killed. We have never had this before. Usually they are undervalued. Now, everyone is overvalued.”

The added cost is hampering local governments even more. Property taxes are calculated by a wide variety of things and no one formula is used for towns, counties, schools, and fire districts. Each one has their own set of rules. Because tax formulas vary so widely, not every assessment value that comes back lower is going to translate into a homeowner’s tax bill being lowered along with it.

Homeowners in trouble over tax bills

In the end, homeowners who need cash now to pay their tax bills have to be creative. Bonnie Grassley’s house in Fort Pierce, Florida is having problems making her tax bill. Though she only has to come up with an additional $150 a month, she is unemployed and living off of savings. She said, “My home means everything to me and it is all I really have. I am determined to keep it, come hell or high water. It is a terrible way to lose your home, just over taxes.”

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Americans are getting more and more creative when it comes to finding money now. The employment rate is still high and the jobs being created are still sparse. That leaves a nation of consumers who have to find their own ways of making money to cover bills. For over 18-months now, the recession has had a hold and a heavy affect on the nation. Although the recession is over, according to experts, some true signs of recovery most likely won’t be seen until mid-2010 at the earliest.

More and more consumers are looking to non-traditional methods of generating cash. Second jobs, freelancing and taking in boarders are all viable options for a financially hurting public. In earlier years, taking on boarders was thought of as a risky move that only the most desperate utilized. Today it’s becoming a more popular choice for those looking to cover their mortgages.

Mortgages and boarders

According to RealtyTrac, in 2009 there were a record number of 3.96 million foreclosures in the country. Add to that another 7 million who lost their jobs and that could mean the number of foreclosures is still going to rise. Consumers are resigning to do whatever it takes to make their mortgage payments, and that includes renting rooms. Offering a non-homeowner the luxuries of a home at a discounted price could work out well for people. It’s a good exchange and lets the homeowner cover their mortgage payment while giving the renter a place to stay that they normally couldn’t afford. There are some cautions however, and here are some of the major concerns:

• Due diligence. It would be nice if consumers could trust other consumers, but today that is not the case. The good news, though, is that the internet allows people to do research on any applicant. Running a background check can give homeowners an added sense of security. Remember that the person renting will most likely have access to all areas of the home when the owner is gone. It’s important for homeowners to be secure with their choice.
• Is renting necessary. All homeowners should ask themselves if renting really is the only option to making a mortgage payment. There are other ways of finding money now that the government stepped into the lending world. Modifications, refinancing and short sales are all viable options for any homeowner to at least explore before deciding on getting a renter.
• Legality. Homeowners should check with local laws for their neighborhood, condominium or subdivision to make sure that there are no rules banning non-related renters. The association should be able to provide the necessary paperwork to assure homeowners are sticking to the law.
• Consider the costs. Ideally, a renter should have a separate entrance, bathroom and bedroom. However, that is not always possible. Homeowners should consider what their options are in terms of slight modifications. Could an office with an adjoining bathroom be turned into a renter’s quarters? Could a basement with a kitchenette double as a rec-room and separate living area? If the renting situation is particularly short-term or would require too hefty a renovation, it may be more reasonable to lower rent and settle for the space available.
• Organize taxes. There are rules regarding declaring rental income, and every homeowner should be well versed. All homeowners should talk to their tax advisor to make sure forms are in order when they file their paperwork.

Renting in 2010

Renting a room can be a practical option for a homeowner having financial difficulties. There are some cautionary measures to take, but it can bring in extra money now when things are tight. A good background check and some research can serve them well and save them from financial disaster.

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A decade ago consumers were borrowing money without thinking. They stretched their finances for no real reason other than because they could. Lenders played along and gave out huge dollars without fully researching how the money would be repaid. It sent the lending world into a tailspin, and consumers struggled to repay loans. According to the National Association of Realtors, in 2007, 12% of all residential sales were for vacation homes and 21% were for investment properties. Many people took on too much debt and now buyers are under financial strains trying to manage it.

Managing too much real estate debt

For anyone who is strapped, there are options. Government-sponsored foreclosure programs are aimed at saving primary homes. Bankruptcy protection is on the rise. Here are some additional ways to manage.

• Refinance loans. Mortgage rates are historically low and all homeowners in trouble should at least consider a refinance. At minimum, a good refinance can cut down a mortgage payment by a few hundred dollars. Of course, some homeowners, whose home’s value has declined considerably, may not have a refinance option. According to Milo Benningfield, financial advisor in San Francisco, “Typically, lending companies won’t offer a refinance loan for more than 80% of a home’s value. That leaves owners who owe, say $200,000 on a condo now worth $170,000 without the ability to refinance.”

• The short-sale. There is also the short-sale option. When a home’s sale price is less than the mortgage total, owners can ask the lender to accept sale proceeds, even when they are less than the total owed. Normally, it’s easier to short-sell a primary home. Chicago attorney Joseph Nery said, “They are being more flexible when they think the only other option will be the customer forecloses on the property.” He also added, “A lender may also try to recoup their shortfall by looking to borrowers’ other assets like equity in additional properties, savings, and even retirement accounts.”

• Modification. The loan modification has grown in popularity in the last few years with President Obama’s push for aid to homeowners in trouble. Making a modification work relies heavily on the person borrowing money having the ability to prove their income is sufficient. The investor has the decision-making power to accept or reject the modification. Nery added, “More modifications are happening, but they involve a reduction of principal or interest rate charges, or other changes like lengthening the term of the loan to make payments more affordable.”

• Bankruptcy. Some consumers are seeking bankruptcy protection to save their homes. Areas like Las Vegas are seeing soaring numbers when it comes to bankruptcies. The market in Nevada is struggling, and according to a recent survey by RealtyTrack, over 60% of homes in the state are in default. Nery said, “Bankruptcy should be a last resort, but if someone reaches that point, they are no longer worried about their credit. They are in survival mode.”

Struggling with overwhelming debt

Borrowing money used to be a simple process. Lenders were quick to qualify consumers without thorough examinations of their finances. In today’s world, however, many people are struggling with that huge debt and looking for ways to manage. Though it is a difficult situation, there are ways to manage an overwhelming debt, but each one comes with its own problems to overcome.

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Back in February of 2009, President Obama addressed a group of high school students about borrowing money and the housing market. At the time, the market was in crisis and the President decided to fix the foreclosure problem with a program set to turn it all around. Unfortunately, that turnaround never came. One year later, an Economy.com survey shows that only about 750,000 homeowners will have received help since that time. It was projected that between 3 and 4 million would be saved from foreclosure.

Borrowing is the issue

According to Mark Zandi of Economy.com, “The more borrowers who can’t be helped, the more foreclosed properties will be flooding the market. And that means the nation’s housing market, which appeared to recover last summer, could soon take another turn for the worse.”

The predictions for the housing market are not good. Many are looking at signs of how the housing plan by the White House didn’t work as the reason. According to RealtyTrac Inc., a record 2.8 million households were in default last year and that’s up by 20% from the year before. This year they should continue to go up.

Home prices in the mix

Home prices are down by about 30% across the nation, and they are predicted to fall even lower as foreclosures continue to bring neighborhoods’ values down. Zandi added, “It is a very serious threat to the housing market, and still one of the most significant risks to the broader recovery.”

It’s not that Obama doesn’t have time to implement the plan. The goal still is to help homeowners in trouble by modifying their mortgages. So far, by using lowered interest rates and longer repayment periods, the average monthly payment has decreased by $500. The modifications require that homeowners have to make three on-time payments in the temporary modification process, and then they can move to a permanent modification. However, only about 7% of the people who signed up for the program has completed it, according to the Treasury Department.

Who is to blame?

It’s difficult to borrow money these days and homeowners are realizing that modifications are not the sure-fire solutions they were thought to be. So who is to blame for the housing failure? Mortgage companies complain that homeowners are slow, and even hesitant, to get back all necessary paperwork. Housing counselors say that maneuvering the bureaucratic maze of laws and rules is almost impossible. For example, the largest company working through the issue is Bank of America. It has completed less than 2% of the 200,000 borrowers who have applied for the modification program. Rebecca Mairone, bank executive for BOA, said that the bank has started “sending out notaries door-to-door to get signed documents back quickly.”

The final blow to the housing market

Finally, the high unemployment rate is not helping the situation. Unemployment is now at over-10% throughout the nation, and job losses don’t make it easy for people to keep up with payments or qualify for modifications. Cindy Rose of Murietta, California knows this firsthand. She and her husband have seen a huge decline in work and they went to their mortgage company for help. Though they initially got a modification down to $1,700 a month, from $2,650, it only lasted a month. Then they received a confusing letter citing reasons why they were rejected. Rose said, “All these horrible things have happened in the economy and there is nobody there for you.”

The future plan of the administration

When it comes to borrowing money for homes, lenders are still closing doors. The reason is that the market is not yet able to rebound from the recession. Unemployment, along with falling home values, are making things more difficult than anticipated. Only time will tell whether or not 2010 will be the year when the housing market is able to stabilize and turn around.

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Many new homeowners end up having to borrow money when trying to set up their new purchase. They already have a hefty mortgage to contend with, but failed to plan for additional costs associated with owning a new home. If you are in the market for a new home or will be any time soon, take a few minutes to do some research on the following items so you don’t fall into financial disaster.

Furniture and remodeling

Everyone loves buying new furniture and remodeling a house to customize it—both are part of the fun of moving in. For anyone who has just closed on a house though, budgets are probably still tight. Research shows that not only are savings gone for new homeowners, but their monthly expenses have most likely grown considerably since the move. New buyers are cautioned to think clearly. Is the beauty of a new granite countertop really going to make up for having to budget other areas strictly? Is a remodeled bathroom really going to pay for itself? Though it may sound nice, remember that there is plenty of time to plan for remodeling a few months, even years, down the road. Not every upgrade needs to happen in the first year.

When it comes to furniture, the same wisdom holds true. Think before you buy. White leather furniture may look great in a showroom, but imagine what it look like after children and animals have used it for a few months. Going overboard with furniture is one of the biggest unnecessary drains on new homeowners’ savings. The best thing to do is set a strict budget and commit to sticking with it.

Don’t ignore repairs

Sometimes it is easy to ignore a leaky roof or a noisy water heater, but ignoring them won’t fix them. It’s best to have a budget set aside for unplanned expenses and use it to cover the cost of routine maintenance. It’s a much better option to spend $65 twice a year for a licensed contractor to check a heating system than to have to replace it for thousands of dollars.

Another tip is to always work with qualified contractors when repairing things around your house. Though a homeowner may have to borrow money to cover the higher cost, it is worth it in the end because the repairman is a trained professional. He or she can fix the problem rather than give you a temporary solution.

Use a tax professional

Although many new homeowners have likely done their own taxes for years, now that a home is in the mix it’s best to get a professional to step in. Owning a home brings significant changes to taxes and the deductions that are allowed. A tax professional can help any new homeowner maximize their refund. It’s a good idea to let a tax preparer at least do the first year of paperwork and then follow his or her template for years to come.

Homeownership is an accomplishment

Owning a home is a huge accomplishment to anyone who manages the purchase successfully. The deal is not over after the closing. In a lot of ways, it just begins because that is when a homeowner is expected to take full responsibility for their property as a house and an investment. Careful planning can help first-time buyers avoid having to borrow money, dip into savings or accumulate credit card debt to manage.

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Many homeowners looking for cash today are trying to refinance. A few short years ago refinancing meant showing proof of employment and finding the right mortgage broker, but in today’s market things are different. Now that the recession is over, the number of people trying to refinance is still high, but the number that are actually eligible is low. For anyone trying to refinance, there are definite steps to take to increase the chances of a successful underwriting plan.

The projected rates in the coming year

Experts are citing that the 30-year fixed rate will stay around 5% for 2010, but if the market improves considerably, that rate could reach 5.25%. According to Keith Gumbinger, financial publisher of HSH Associates, a survey of lenders posted the national average of a 30-year rate at 5.01% in April of 2009. The rate for a 5/1 adjustable-rate mortgage is 4.6%. Noting that the difference between the two is so close, Gumbinger said choosing an ARM now is not a wise decision. As inflation increases the rates will go up too, but given the condition of the market, that is highly unlikely in the near future.

Qualifying for good rates

Fannie Mae and Freddie Mac back about 70% of the mortgage loans in the market today. Generally, getting these loans will get you the lowest rates. To qualify for these loans however, applicants must have credit scores of at least 720 and equity of 20% or more. Applicants living in the home they are trying to refinance have a better shot at it and if it’s a single-family home their chances are even higher.

Necessary documentation for a refinance

For anyone looking to refinance, it’s important to be proactive. While in the old days it was simple to get a loan, today’s world has a long list of necessary documentation and potential borrowers who provide information have a better chance of getting refinancing. Providing a prospective lender with your current credit score and an estimate of your home’s value can open the door to refinancing. Homeowners looking for cash today through a refinance need to also provide a month’s-worth of paystubs, two years of W-2s, two years of tax returns and any other pertinent financial documents. Mortgage broker Tracy Tolleson instructs her clients to fill out applications for refinancing and pay for an appraisal prior to formally shopping for the refinance also.

Where to apply for a refinance

When it comes to where to refinance, homeowners should call at least three lenders, including credit unions and local branch offices of national, regional and local banks. Guy Cecala, publisher of Inside Mortgage Finance, said that some banks that previously only served affluent customers are now opening the door to all customers. This is a great time for all potential refinancers to see what the market has to offer.

Refinancing and its benefits

Homeowners in need of cash today should look to refinancing, but with caution. It will take more documentation and effort than ever to actually get a new loan. For those who have a high enough credit score, proof of employment and proof of financial stability, it is a great time to venture into the world of the refinance. Banks and credit unions are at a loss when it comes to good-credit borrowers and are opening the doors wider to new customers.

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The new chronic problem with about 25% of US homeowners is having an “underwater” mortgage. The term means homeowners who owe more than their houses are worth. Due to the decline in home values as a result of the recession many homeowners are finding themselves in this position. Recent studies are showing that before the recession makes a marked change for the better, about 50% of homeowners will find themselves with “underwater” mortgages.

The good mortgage news

There is good news though, when it comes to the overall state of mortgages today. Despite the number of underwater mortgages steadily projected to grow, there is another group of homeowners who are surprisingly safe. A study by First American CoreLogic, is showing that about 23 million homeowners have 20% or more equity in their properties, and about 1 million more own their houses outright. Owners in this position are faced with the question of what to do with their equity. Although it’s great to have a good amount of equity in a property, there are two concerns that every homeowner needs to face:

1. If homeowners borrow against their equity and home prices continue to fall, they could end up in the “underwater” position.
2. If homeowners don’t borrow against equity, the cash that could have been taken out may disappear.

The general rule of thumb is to never borrow more than 80% of the value of a house. That way even if there is a decline in value, owners still have some cushion to protect them from losing too much equity.

What to do with equity

When it comes to figuring out what to do with equity, there are some options that homeowners look into. Debt consolidation, home remodeling and car purchasing are three things that many homeowners use home equity funds for. Though this may be a convenient option, looking at each deeper reveals how little advantage there really is to each one of them.

Debt consolidation. It’s no secret that many Americans are mired in debt. A lot of homeowners make the quick move to consolidate when they have high-interest credit. This may sound like a good idea, but in reality there is more to the equation. Once a consumer turns their debt around by putting their home on the line, they have transferred their problem into a secured debt. A better move may be to file bankruptcy because that eliminates debt altogether. The only time it’s a good idea to convert equity to a loan for bills is if the total sum owed is moderately low and the reason for the debt has been identified. Homeowners should realize what brought about the debt in the first place and commit to changing their spending habits.

Home remodeling. Another thing people with high equity look into is home remodeling. Many homeowners believe that remodeling automatically adds value to a house, but that is not necessarily true. There are some changes that will add value, but not all remodeling brings an automatic return. A rule of thumb when it comes to home remodeling is to pay with it for cash, rather than take equity out of the house. The most popular renovations are bathroom and kitchen remodeling. Each one can bring a return on investment if they are done cautiously, kept within a strict budget, and paid for predominantly with cash.

Car purchasing. Some homeowners use home equity to fund their new cars. One-hundred percent of the time this is a bad idea. Why? Because cars lose value the minute they are purchased. A general rule of thumb is to make a purchase funded by home equity only if that purchase appreciates in value. Cars definitely don’t fall under that category. If a car is a necessity and the only option is using a home equity loan, then the car needs to be paid off as quickly as possible.

Equity should not be taken lightly

Due to the high number of “underwater” mortgages out there, anyone who has equity in their property should guard it cautiously. Things like debt consolidation, home remodeling and car purchasing may sound like good ideas, but according to experts, they aren’t. It’s better to leave equity where it is than risk losing it with an unwise move.